Commentary on how China and the world are adapting to each other -- or not.

September 29, 2010

Indigenous Innovation: Determining "Our" Position

Last year iron ore was the big worry with China. This year it's "Indigenous Innovation" and rare earths. The latest take is given by Adam Segal, a senior fellow at the Council on Foreign Relations. A long-time astute observer of Chinese technology policy, in a brief commentary posted on the Foreign Affairs website yesterday, Adam recognizes that the Chinese government has given in to pressure and relented on some of the most odious elements of Indigenous Innovation, such as by modifying government procurement policies. Yet he expresses deep concerns that these concessions are only limited changes in tactics and keep in place China's worrisome larger strategy. Here's the key paragraph in his piece:

The problem for the United States is that these concessions are more tactical than real shifts in underlying policy. China’s leadership is broadly committed to the goals of reducing dependence on foreign technology, producing Chinese intellectual property, and creating Chinese technology champions. Even if China reverses certain policies under U.S. pressure, it will remain dedicated to those goals. U.S. policy is likely to become a game of Whac-a-Mole, beating down one Chinese initiative on indigenous innovation only to see another pop up.

I have 2 problems with this argument. First, the whac-a-mole strategy has been an unmitigated success. The US has the opposite problem of Ah Q (maybe we should call it "Z Q"): it walks around imagining defeats when it has achieved substanial victories. As I wrote in a piece published earlier this month for China Economic Quarterly (and posted with their permission), there is a consistent pattern of China issuing unacceptable technology policies and then modifying them in the face of massive public criticism by foreign industry and government and quiet complaints from Chinese businesses with extensive foreign partnerships and pro-liberal Chinese experts. The most worrisome policies -- software encryption, WAPI, the CCC Mark for information security products, Green Dam, the Indigenous Innovation catalogues, government procurement rules -- were all challenged and defeated.

The second problem is the implicit view that the US government and US industry have the same interests and should have the same position on Chinese policies. I can see why American companies would be quite worried about interventionist Indigenous Innovation policies even if they are compliant with WTO rules -- the rules in some ways reduce market access to China and in some instances will yield more competitive Chinese companies who may take market share away in China and elsewhere. However, the USG, or at least USTR, has a different mandate: whether China breaks the rules. And on that score, the pattern of Chinese behavior -- its initial policies and then retreats -- is not as worrisome. By and large China has skirted the line and crossed ocassionally, but it has pulled back and crossed back when challenged.

The issue of whether China should have an interventionist technology policy is less about the rules and more about what would be in the best interests of Chinese and foreign industry. There we can have a very good argument about the strengths and weaknesses of indsutrial policies as opposed to government taking a lighter touch. BTW, I don't know many folks who now encourage an entirely "free hand of the market" approach. The "ligher touch" means government facilitating and supporting instead of directing, not sitting on its hands. Framing Chinese behavior as about compliance may be a good lobbying strategy for US multinationals, but that's not the real issue; it's competitiveness.